When collateral is transferred under the loan agreement, all rights pass to the borrower. These include voting rights, the right to dividends and rights to other distributions. Often, the borrower sends equal payments to dividends and other returns to the lender. Stock lending fees are an often overlooked cost associated with short selling a stock. While short selling can be lucrative if the trader`s point of view and timing are correct, its cost can be quite high. In addition to the share loan fees, the trader must pay interest on the margin or borrowed money to be used as collateral on the borrowed shares and is also required to make dividend payments on the pre-selected shares. Either way, if a borrower intends to object to such fees in a loan agreement, it is imperative to seek timely legal advice. Simply refusing to pay the loan on time, including fees, can lead to a breach of contract, which can lead to damage to the lender. A question that often arises in a dispute over a loan agreement is whether certain fees, such as cancellation fees. B or installation fees, are payable at the time of payment.
Depending on the circumstances, such fees may constitute a penalty and therefore not be applied by the lender against the borrower. Then the question arises: can the fees of a loan agreement, such as termination or installation fees, be penalties? A short sale involves the sale of borrowed securities. These securities must first be located in a margin account and lent to the short seller. While the shares are borrowed, the short seller must pay interest and other fees on the borrowed shares. Stock loan fees can be compared to a stock loan discount, which is a payment received from those who lend shares to others. Stock loan fees or loan fees are fees charged by a brokerage firm to a client for borrowing shares. A stock loan fee is charged under a securities lending agreement (SLA) that must be completed before the stock is borrowed by a client (whether it is a hedge fund or a retail investor). Stock lending fees may be worth paying if short selling is lucrative, but traders should always make sure to include them in the risk-return ratio of their trades. The parties subsequently agreed to reduce the amount borrowed to $500,000, but the cost of establishing the loan was not reduced to reflect the lower amount, meaning that it represented 5.3% of the amended facility. The lender`s certificate of offer was not maintained because the Buddhist Society was unable to pay the loan on time. The lender withdrew its offer of financing, terminated the loan and demanded lump sum damages that included installation costs.
It is clear that various fees included in loan agreements may not be enforceable because they are a penalty under the law. The courts will review all related circumstances to determine the purpose of the clause. If the fee is proportionate and intended to cover a loss, it is likely to be enforceable. However, if the purpose of the clause is simply to punish a party for a breach and there is no way to quantify the amount calculated, it is likely that the clause is a penalty. Suppose a hedge fund borrows one million shares of a U.S. stock that trades at $25.00 for a total loan amount of $25 million. Let`s also assume that the share loan fee is 3% per year. The stock loan fee per day, assuming a 360-day year, is therefore ($25 million x 3%) / 360 = $2,083.33. The amount of share lending fees depends on how difficult it is to borrow a share – the harder it is to borrow a share, the higher the fees.
Since short sellers immediately sell the borrowed shares, the borrower must reassure the lender by providing collateral such as cash, Treasury bills, or a U.S. letter of credit. Bank. If the collateral is in cash, the interest that the stock lender pays to the borrower can offset a portion of the share loan fees. The Court of Appeal ultimately ruled that the lender did not have the right to withdraw the financing offer and claim lump sum damages, but in each case it considered whether the cost of establishing the loan was a penalty. It was held in the Court of Appeal that the amount of 1.5% of the original credit facility was as follows: There is nothing wrong with a loan agreement or a contract that sets an amount to be paid at a particular event, such as a breach of contract.B. These clauses are commonly referred to as “lump sum damages” clauses. The borrower also attempted to justify the number based on the risk associated with the loan. The court rejected this decision, noting that while the risk may be relevant to setting the lender`s “price” for the transaction, it does not address the quantification of the loss of an infringement.
Most of the shares held by brokerage firms on behalf of their clients are in the “street name”, which means that they are held in the name of the brokerage company or other nominee and not in the name of the client. This allows the broker to lend the stock to other investors. The goal of the short seller is to sell the securities at a higher price and then buy them back at a lower price. These transactions occur when the debtor of securities believes that the price of the securities will fall, which allows him to make a profit based on the difference between the purchase and purchase prices. Regardless of the amount of profit, if any, that the borrower derives from the short sale, the fees agreed to the credit intermediary are due at the end of the contractual period. Shares are usually borrowed for the purpose of short selling. The degree of short interest therefore gives an indication of the amount of share lending fees. Stocks with a high level of short interest rates are harder to borrow than a stock with a low short interest rate because there are fewer stocks to borrow. As regards the question of why the installation fee remained constant after the change in the amount of the facility, the Court found that the amount had not remained unchanged on the basis of a calculation of losses, but rather on the basis of the additional administrative burden that the creditor had to pay as a result of the changes to the proposed loan.
This issue was recently considered by the Victorian Court of Appeal in Melbourne Linh Son Buddhist Society v Gippsreal Ltd [2017] VSCA 161. In this case, the Buddhist Society intended to borrow $1,775,000. The loan agreement included a “loan installation fee” of 1.5%, which amounted to $26,625. Traders who plan to sell a stock short should carefully consider these fees when determining the risk-return ratio of their trades in order to avoid unexpected surprises. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in several cities, covering the latest news, politics, education and more. His expertise lies in the areas of personal finance and investment as well as real estate. `is not related to any damages or interest of the defendant resulting from the alleged breach of the offer document by the applicant and it is not in the reasonable commercial interest of the defendant to be protected by that instrument in the event of a breach thereof. In determining whether a clause is unenforceable as a penalty, the usual rules limiting the admissibility of evidence relating to the accompanying circumstances arising from Codelfa Construction v State Rail Authority (NSW) (1982) 149 CLR 525 do not apply. The Court is free to go beyond the actual wording of the clause in order to determine whether it objectively constitutes a penalty. No matter how the parties describe the clause, it depends on its substantial effect.
Finally, the Court also concluded that the fact that the amount was fixed and agreed between the parties had no bearing on whether the amount constituted a penalty. It is up to the court, not the borrower, to determine whether an amount constitutes a penalty. The court considered that this administrative work had been carried out prior to the infringement and therefore could not constitute a forecast of the loss resulting from the infringement. The Court also concluded that there was no way to quantify the cost of the additional administrative work, since there was no specific link between the costs and the work performed. Therefore, it is an “irresistible conclusion” that the fees were retained to punish the borrower for the inconvenience caused by the changes. The test of when a lump sum damages clause becomes a penalty and therefore unenforceable was determined by the High Court of Australia in paciocco v. Australian and New Zealand Banking Group (2016) 258 CLR 525. Essentially, a clause is a penalty if it requires one party to pay the other an amount that is “extravagant” or “unscrupulous” and disproportionate to the legitimate interests of the party receiving the amount. That is, the amount specified in the contract must be an “actual forecast” of the loss that the party will suffer.
The majority of Justices Kyrou and Cameron AJA, who make up the majority of the Court of Appeal, noted that the clause was a punishment in the given circumstances, as the character “I am a frequent reader of Lexology, because it is an efficient and concise service. This is very relevant because much of this communication comes from law firms that have a clear interest in marketing their organizational expertise in key areas of business law” “in the given circumstances a random, completely disproportionate and excessive number.” . . . .